The Great Recession that began in 2008 was triggered by not just housing debt, but by record accumulations several other types of household debt, including credit card debt. And although levels of credit card and other non-housing debt generally fell from 2008 to 2013, its now approaching the pre-recession peak.
Takeaways From the Q2 2016 Household Debt Report
According to the The Federal Reserve Bank of New York's Center for Microeconomic Data report on Household Debt and Credit, total household debt balances grew slowly in the second quarter of 2016. As of June 30, 2016, total household debt reached $12.29 trillion, a $35 billion (0.3%) increase from the first quarter of 2016. To put this in perspective, overall household debt remains just 3.1% below its peak of $12.68 trillion, that was reached in the third quarter of 2008, just as the financial crisis struck. This figure is also 10.2% above its low point reached in the second quarter of 2013, just as the recovery was picking up its pace.
At the same time, the nation's cumulative credit card balance reached $729 billion, up $17 billion from the first quarter. This is below its peak of $866 billion reached in the fourth quarter of 2008, but we are now on track to reach pre-recession levels of credit card debt around the second quarter of 2017.
A More Complicated Picture
It would be tempting to look at a simple chart of our nation's total credit card debt and predict another recession to occur when we reached the same level that existed when the last recession occurred. But just as generals are often seen as making the mistake of trying to fight the last war, economists and other pundits can certainly fail to predict the next recession by examining the conditions that lead to the previous one.
For example, the new data on credit cards shows that delinquency rates have continued to decline since peaking in 2008. The rate of credit card delinquency improved to 7.2% in the second quarter of 2016, down from 7.6% in the previous quarter. In fact, the number of credit card accounts that are greater than 90 days delinquent is the lowest it's been in well over a decade. The same downward trend is clear when it comes to mortgages, auto loans, and revolving home equity lines of credit, however student loan delinquencies continue to hover near record high rates.
And while overall credit card debt is up, credit card usage is actually down substantially from previous highs. While credit card usage peaked in 2008 at 68 percent of borrowers, it then declined sharply to 59 percent during the Great Recession due to banks reactively and proactively closing accounts. The Fed report also cites the Card Act of 2009 as reducing lending to younger borrowers and curtailing marketing practices. The current rate of credit card usage is now just 61 percent, which is attributed to those with poor or bad credit scores being unable to obtain a credit card account. About half of those borrowers with sub prime scores have credit cards now, compared with more than 60 percent in 2007, while the rates remained steady among those with better credit scores.
As the economy recovers, overall credit card debt has increased. But by examining other aspects of credit card use, a healthier picture of the economy emerges.